Why Are Delayed Payments So Common in the Construction Industry?
For decades, delayed payments and the construction industry have gone hand in hand. The process of construction payments is outdated and ineffective.
What is it about construction that makes it so difficult to get paid? The answer is in the way the payment chain works.
An Up-Close Look at the Payment Chain
Up at the top of the construction payment chain are the major stakeholders: the property owner/lender and the general contractor. The next step down is a variety of subcontractors. Finally, at the bottom of the chain, are material suppliers.
Delayed payments start at the top of the chain. The property owner or lender expects work to be done before payment is made, so the general contractor has no cash on hand to pay the subcontractors before they begin work. The subcontractors work on credit. They also have little to no cash on hand, so they need the materials from their supplier before they receive payment from the contractor.
COVID-19 has thrown a wrench into the already complex payment chain. The $1.3-trillion U.S. construction industry mostly relies on a global supply chain. The pandemic has caused mass supply-chain disruption, leading to project completion delays and increased costs [Hotel Business].
The further down the payment chain you are, the longer you have to wait to receive payment.
A majority of subcontractors in America have dealt with late payments and even nonpayment. 43% of subcontractors wait approximately two months for payment. 30% wait over two months. This has led to 72% of subcontractors offering discounts in exchange for payment within 30 days [For Construction Pros].
Without a steady stream of cash, general contractors and subcontractors have a difficult time operating a successful business.
Bob is a perfect example of this.
Bob is a general contractor who’s hired to build a home. He gets to work finding subcontractors to help him complete the work. The subcontractors complete their jobs and are waiting for payment. Bob files paperwork with the lender so that he can draw the funds to pay his contractors, but it takes longer than anticipated. His payment is late. His accountant is frustrated because the subcontractors have been calling him asking for payment. The subcontractors are upset because they didn’t get paid on time, and now they are hesitant to work on another job with Bob again. Bob is overwhelmed, and his business is in trouble because of delayed payments.
A Reliable Solution
Construction payments don’t have to be this way. Joe has found a solution.
Joe is a contractor who gets hired to build a home right next to the one Bob just built. Joe hires some subcontractors and gets the house built on schedule. Throughout the build, Joe has been working with his lender to process payments quickly and on time. The lender and Joe both use CoFi’s construction lending software, so they are on the same page every step of the way. The subcontractors are happy because they got paid on time, and they are excited to work on the next job with him. His accountant is content because all payments are being made on time, and there are no liens. Joe is happy and is able to take on more jobs because his business is cash flowing.
CoFi is the Construction Payment Solution
CoFi is fixing and updating the broken construction payment system. Our team has taken the needs of the lender and the contractor into consideration and delivered a reliable solution for delayed payments. We’re changing the way construction is done, and we’d love for you to join us in bringing the industry into the twenty-first century. Schedule your personalized demo today.